Direct-to-consumer, home-delivery mattress business Purple Innovations Inc. (PRPL, Financial) has made quite the splash lately. The company produces mattresses and other bed-ware items via its website and delivers directly to consumers’ homes.
Purple’s mattresses start at $699, and it offers both free delivery and a 100-night money-back trial. Purple has seen massive and rapid growth, and was recently acquired by a New York shell company that valued Purple at over $1.1 billion.
Will the mattress startup continue its impressive growth trajectory? Let’s take a look.
Proof in Purple’s financial pudding
Purple has seen massive growth over the last two years of recorded financial data. The startup began reporting in 2016 and has seen very impressive revenue growth every quarter since.
Revenue growth has been significant. In 2016, revenue was $66.5 million. This expanded by almost 300% to $190 million in 2017. Estimates abound about 2018 total revenue, but experts expect the number to exceed $400 million, which would be a two-fold increase over the previous year. This is very substantial growth and bodes positively for the future. If Purple can continue its growth trajectory, revenue could exceed $1 billion within a couple years. Currently, growth drivers include excellent word-of-mouth, online postings and viral videos. A more widespread and strategically planned marketing campaign could well yield even greater rewards.
Ebitda is also showing very positive signs. If the company continues its positive growth trajectory, and margins stay consistent, the stock price could sit at approximately 10x Ebitda in the coming years, which would forecast a $30 stock price. That 3x increase would be a welcome growth for Purple’s new (and old) shareholders.
The key to continued expansion and Ebitda growth will be sales expansion and marketing, and the question remains: Can Purple expand rapidly without altering margins too dramatically? That will be the true test of the business’s financial might and attractiveness. If it can pull off the feat, it will reap rich rewards for shareholders. After all, Purple currently holds less than 1% of the global mattress market. That is a tiny share and means exciting future prospects, especially when one considers that the fastest growing subsector of mattresses is home-delivered, specialty mattresses.
Purple’s new corporate structure
Helping to ensure its long-term health and growth, Purple merged with a New York parent company in a deal finalized in early February. The new company now trades on the NASDAQ as PRPL. The deal, in which Purple has become a wholly-owned subsidiary of the parent company, changed the name to Purple Innovation LLC.
The deal also valued Purple and its assets at $1.1 billion, allowing Purple to continue its expansion trajectory. It gives it increased financial heft. It remains to be seen if the new era will pay off, but it certainly has great potential.
One positive we can see already is that, despite being acquired, Purple’s corporate leadership will remain steady. The original startup founders remain at the helm of the company and own a majority stake in the parent company’s stock. This will ensure that the leadership that got Purple to where it is today will continue to steward the company moving forward.
Assessing the challenges ahead
How big is the home-delivery mattress market anyways? And, what is the saturation point? These two questions are among the most important to ask when evaluating Purple’s potential future problems and challenges.
The mattress industry is worth billions of dollars in sales every year, and the specialty market is by far the fastest growing segment of the sector. Purple currently holds only about 1% of the global mattress market and has not yet tapped the potential of a mass international market. This bodes well for Purple. However, the market is becoming increasingly saturated with fast-growing competitors including Casper (a very similar mattress startup based in New York) that Purple must compete directly against. A competition over price and service could end up pressuring margins.
Verdict
For growth-oriented investors, Purple looks golden. The company’s expansion prospects do not look likely to face severe challenges, at least over the relative near term. Revenue projections for 2018 are impressive and the company will only gain further value as it settles into its new corporate structure, leadership and role as a public company. We see Purple as a potential growth giant worthy of investors’ consideration.
Disclosure: I/We own no stocks discussed in this article.
